Enel announces coal plants closures

Enel, Europe’s biggest utility by market value, has given the first hint of the impact of new EU pollution limits in announcing the closure of two large coal power plants by 2018 and a plan to close all of its coal and lignite generation by around 2030.

Enel’s move gives the first glimmers of the likely impact on Europe’s fossil fuel utilities of pollution limits agreed to less than three weeks ago.

The IIEEFA described the likely impact of those limits in a report we published on May 8 (“Europe’s Coal-Fired Power Plants: Rough Times Ahead: Analysis of the Impact of a New Round of Pollution Controls”) on the heels of EU member state passage of a revised Best Available Techniques Reference Document, known as “BREF.”

BREF sets, among other things, new upper limits for emission of oxides of nitrogen and sulfur (NOX and SOX) by large installations that burn carbon-based fuels like coal and lignite. Its implementation begins in 2021.

Enel made its reaction known at its annual shareholders meeting earlier this month. While company executives made no mention of BREF, it is impossible that they are unaware of the news rules and it is highly unlikely their decisions are not shaped by them.

The brass at Enel and every utility of any size in Europe-know full well that will make life difficult for the most egregious polluters. They face tough choices as to whether to invest substantially in pollution abatement at the plants in question, cut running times dramatically, or shut down.

Enel says that before 2020 it will close two coal-fired power plants operated by its subsidiary Endesa: Teruel (also called Andorra) and Compostilla. Both plants were a group of 108 plants named as “low-hanging fruit” in our report. Teruel, by our lights, was 176% over the revised BREF NOX limit in 2014 and 917% over the SOX limit. The two Compostilla units were 363% and 404% above the NOX limit.

Utilities will no doubt still try and eke life out of some borderline, and not so borderline, power plants by investing in NOX and SOX abatement. This is a high-risk strategy, and investors would do well to scrutinise such plans, which may not represent a sound use of their money—especially in the case of older and more polluting plants.

A far more prudent strategy would transcend merely trying to squeeze old assets for residual value and would attribute value to pollution reduction. That’s the path investors should push.

Where Enel is falling short here is in its plans to invest €350 million in three other Endesa coal-fired plants—AS Pontes, Litoral and Alcudia—to make them compliant beyond 2020 (either with the revised BREF or the present round of Industrial Emissions Directive limits, the company is unclear on that point).

All three power plants are among IEEFA’s low-hanging fruit. AS Pontes (I-IV) was 65% over the revised NOX limit in 2014, according to our calculations. Litoral (I and II) was 93% over the NOX limit, and 528% over the SOX limit. Alcudia I to IV units were from 52% to 104% over the NOX limit, and 134% to 370% over the SOX limit.

Enel, which has its corporate headquarters in Rome, made no mention at its shareholder meeting of other power plants that may exceed the revised BREF, including those it owns in Italy. Our report names, for example, the company’s Sulcis power plant as exceeding both the revised NOX (by 68%) and SOX (by 83%) limits in 2014. This power plant is in Sardinia, a relatively poor region of Italy, where we acknowledge potential social barriers to closing it.

More broadly, BREF implies greater headwinds for coal and lignite power over the next decade, given such assets are polluting, potentially expensive to run, and inflexible.

“For me, within 10-15 years we [as ENEL group] will no have any longer coal power plants,” he said at this month’s shareholder meeting.

Similar vibes are coming out of Italy’s government. On May 10, the minister for economic development, Carlo Calenda, suggested the country may get rid of coal-fired electric generation entirely by 2025 or 2030.

“A total coal phaseout between 2025 and 2030 is possible, but will cost about 3 billion euros over the baseline scenario, and the issue of authorisation timing for new gas power plants and new infrastructures would have to be addressed,” he said at a public hearing before Parliament.

The revised BREF will be implemented from 2021, introducing stiffer limits than those introduced from January 2016 under the Industrial Emissions Directive (IED). Under the present round of IED emissions controls, power plants had a choice to either meet the new emissions from Jan. 2016; delay full implementation until June 2020 under so-called transitional national plans (TNPs); or “opt out” and close by 2023.

All European fossil fuel-based utilities will have to make investment decisions like the ones Enel is facing. And they must do so quite soon, given the risk inherent in adopting a wait-and-see approach (our report talks more about that and a commentary we published earlier this week touches on it as well).

Enel is an especially interesting case, as its CEO has vowed to be make it the world’s first “truly green energy giant” and to be carbon neutral by 2050. Its recent stepping back from coal and lignite come as little surprise in that context—and probably occurs with public relations in mind.

How other utilities react to BREF will help frame their image too, and will drive their investment returns over the next decade.